Global Economics

The Bloodbath of British Banks

Following a huge loss by RBS on Jan. 19, investors turned against other City of London bastions, including Lloyds, Barclays, and even HSBC

Royal Bank of Scotland (RBS.L) announced the biggest loss in British corporate history yesterday. The news triggered fears the bank would be nationalised and caused a bloodbath in shares across the sector, overshadowing the Government's latest financial bailout.

RBS stunned the market by predicting a loss of up to £28bn for 2008, writing off as much as £8bn of toxic assets and £20bn from the value of acquisitions, including the disastrous takeover of the Dutch bank ABN Amro in 2007. The scale of the losses raised fears that RBS would be fully nationalised and that other banks, such as Barclays, could find themselves controlled by the state.

Shares in Barclays (BCS) and the new Lloyds ( LLOY.L) group also fell. The Government was first forced to intervene in October with a £50bn recapitalisation of the major UK banks. RBS, which owns NatWest, Direct Line and Coutts, the Queen's bank – was already 58 per cent owned by the Government after it came close to collapse in October. The bank, which was one of the world's 10 biggest, swapped £5bn of preference shares held by the Government for new ordinary shares, giving the state a 70 per cent stake in the bank and making it more secure.

RBS shares lost two-thirds of their value, closing at just 11.6p. Stephen Hester, the bank's chief executive, said full nationalisation was a possibility and had been discussed "only as something we all wished to avoid". But with the economy so fragile, nationalisation was possible, he added.

Although some Labour MPs called for full state ownership, ministers insisted that was not their goal. But the Chancellor, Alistair Darling, did not rule out the move as a last resort, saying: "The Government has to continue to do whatever is necessary to get credit flowing."

The collapse in bank shares was embarrassing for ministers, who yesterday morning hailed a short-lived rise in share prices after they announced their second rescue package. Last night, they insisted their plan was about saving the economy, not the banks, and that share prices were not in their minds when they drew up the latest measures.

The Government's first bailout in October was meant to restore confidence by injecting more cash into the banks to protect against losses. But shocking results from Bank of America, Deutsche Bank and others last week showed markets became worse than ever in December, battering the values of risky investments and loans stuck on lenders' balance sheets.

The Treasury announced a raft of new measures yesterday, designed to further support confidence in the system and get the banks lending to support households and companies. The plan included agreeing to sell the banks guarantees against losses on toxic assets, extending a Bank of England scheme that lets banks swap illiquid securities for Government bonds, and underwriting new issues of mortgages and other loans parcelled up as bonds to boost funding.

Gordon Brown, who said he was "angry" about RBS's excessive lending, added: "I am not going to stand idly by and let people go to the wall because of irresponsible mistakes of a few bankers." He denied the new scheme amounted to a "blank cheque" but could not estimate how much taxpayers' money would be at risk. City experts said the gamble could run into hundreds of billions of pounds.

George Osborne, the shadow Chancellor, said: "It is the clearest possible admission that the first bailout of the banks has failed and now they have no option but to attempt a second bailout – a bailout whose size we still don't know, whose details remain a mystery and whose ultimate cost to the people of Britain will only be known when this Government has long gone."

Jane Coffey, head of equities at Royal London Asset Management, said: "These were helpful measures but there was a realisation with RBS coming clean that this problem is even bigger than people had thought. What these measures haven't done is get rid of concern about toxic assets because they don't cover the worst of the stuff."

Banking stocks were traded in huge volumes, indicating a mass flight from the sector, with nearly 743 million RBS shares changing hands and a total of 1.2 billion bank shares traded.

David Buik, of BGC Partners, said: "What has frightened us all this afternoon are the volumes – people looking to get out. This is grown-up turnover."

Lloyds Banking Group shares tumbled on their first day of trading, losing a third, after Lloyds TSB bought Halifax Bank of Scotland (HBOS) last week in a government-brokered deal to save HBOS from imploding. Investors fear that HBOS's losses on credit investments and commercial property could seriously damage Lloyds.

RBS's shocking loss hit confidence in Barclays, whose shares had already lost a quarter of their value on Friday and fell 10 per cent yesterday. Barclays is one of the biggest players in the debt markets that have damaged RBS. Many investors believe Barclays could suffer losses that force it to be nationalised, though it issued a statement on Friday predicting a £5.3bn profit for 2008, saying it was financially strong.

Analysts at Dresdner Kleinwort said a possible future shortage of capital following further asset deterioration could eventually push [Barclays] into the arms of the Government if existing shareholders were unwilling or unable to provide yet further support and share price weakness persists.

HSBC, the only UK bank not to raise new capital in the crisis, said it had no plans to accept government capital and could see no circumstances in which doing so would be necessary. Its shares fell by 6.5 per cent yesterday.